Target may be forced to halt buybacks: analyst

By Andria Cheng

Bloomberg

The drama surrounding Target Corp.’s data breach continues.

Texas law-enforcement officials over the weekend reportedly arrested two Mexicans. The two had allegedly used credit card information stolen from Target to make tens of thousands of dollars of fraudulent charges at retailers including Best Buy and Wal-Mart. However, a federal official on Monday said the credit card fraud wasn’t tied to Target’s
/quotes/zigman/253872/delayed/quotes/nls/tgtTGT data breach, the Wall Street Journal reported. Target declined to comment on whether the arrests had anything to do with its security breach, except to say “the investigation is active and ongoing.”

Meanwhile, cyber-intelligence firm IntelCrawler, which generated news headlines last week for identifying a nearly 17-year-old Russian as the author of the malware that led to the Target hacking, has also changed its original identification of the teen to another teen, and said the person it originally identified was working closely with the malware’s actual author.

Still, to be safe, the firm’s CEO Andrew Komarov told MarketWatch “We want also to point your attention that it is the key author and exact person, but we can’t confirm his name, age or city, as it can be fake.”

As the investigation continues, the financial community is parsing the potential negative impact. Target shares fell to their 52-week low on Tuesday after Cowen & Co. cut the stock to underperform from market perform.

Analyst Faye Landes said she expects Target to suspend its buyback indefinitely to help shoulder costs from the data breach.

“We cannot estimate the costs related to the credit breach, including replacement cards and terminals, legal and settlement fees, and doubt that (Target) will have visibility on these costs for some time,” she said in a report. “We therefore expect (Target) to err on the side of prudence.”

Landes, who slashed her price target on the stock to $47 from $66, said Target may need to shoulder the cost of replacing up to 40 million cards at $10 apiece. She said it’s unlikely that Target has insurance related to potential lawsuits from banks. Target may need to replace about 50,000 of its so-called point-of-sale systems at cash registers. While Target has cut its outlook earlier this month, the analyst said “there’s definitely further risk to (per-share profit) should Target’s fundamentals continue to be weak or deteriorate.” Every 0.5 percentage point dent in comparable sales in the U.S. versus her estimate represents about a 15-cent hit to the company’s annual per-share profit, Landes said, adding every $100 million in incremental expenses is also another 15-cent profit hit.

Target spokesman Eric Hauseman said the company’s approach to share repurchases hasn’t changed. “We remain committed to share repurchase over time and have consistently maintained that we will govern the pace of repurchases with the goal of maintaining our strong A credit rating,” he said. Target has spent $10.18 billion in share repurchases between 2008 and 2012 and has spent another $1.47 billion in the first three quarters of 2013, he said, adding that Target’s approach to dividends hasn’t changed.

Target has declined to comment on issues relating to the data breach before.
– Andria Cheng
– Follow her on Twitter @AndriaCheng

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About Behind the Storefront

Behind the Storefront is a blog about all things retail. It’s aimed at investors, shoppers and anyone else with a passion for learning about what drives consumer behavior. Hosted by Andria Cheng, Behind the Storefront will cover the business, brands and shopping behavior that’s behind some of the biggest companies, and largest employers, in the world. You can reach Andria at Acheng@marketwatch.com.